Broomfield News

Level 3 to acquire TW Telecom for $5.7 billion, CEO Herda to exit

By Andy Vuong The Denver Post

Posted:
06/16/2014 07:30:30 AM MDT

Level 3 headquarters in Broomfield, as seen in this 2007 file photo. (RJ Sangosti, The Denver Post file)

Level 3 Communications will acquire TW Telecom for about $5.7 billion in cash and stock, merging two Colorado-based Internet network operators with a combined workforce of more than 13,000, the companies announced Monday.

Since their networks are largely complementary, analysts say the purchase of TW Telecom will help Level 3 compete with larger rivals, some of whom are also gaining scale amid the recent wave of cable and telecom consolidation.

While there is little network overlap, TW Telecom is headquartered in Littleton, about 35 miles south of Level 3's main campus in Broomfield. That means employees in metro Denver are expected to bear the brunt of job cuts when the companies shed duplicate corporate positions.

"We know our primary competitors are very large companies, whether they're incumbent telcos or cable companies," Level 3 CEO Jeff Storey said Monday during a conference call with analysts. "We believe that this combination gives us the scale to effectively compete, although we're still much smaller, which gives us the ability to maintain the nimbleness that both companies are known for and will help us win in the marketplace."

Level 3 operates globally, while TW Telecom serves customers in North America. They carry Internet data and offer related services for business clients.

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Level 3 built its reputation as a network operator that transmits data over long distances. TW Telecom has fiber-optic connections into thousands of office buildings in major metro areas that Level 3 doesn't currently reach.

"That's going to enable Level 3 to be a broader competitor," Cowen & Co. analyst Colby Synesael said. "If you think about the competitive environment for communications three or five years from now, scale and having a national presence are going to matter more."

He cited deals such as Comcast's pending acquisition of Time Warner Cable and AT&T's proposed purchase of DirecTV.

TW Telecom employs nearly 3,400 people, including 1,300 in Colorado. Level 3 employs about 10,000, including 2,700 in the state.

"Scale matters," said Herda, who has helmed TW Telecom since 1998. "It helps drive lower costs and our ability to compete with large and growing competitors."

The companies expect to save $240 million a year in operating costs and investment expenses.

"From a head-count and a non-head-count perspective, obviously we have the normal synergies — common corporate duplication — but the idea is to make sure we keep the sales force we have," said Level 3 chief financial officer Sunit Patel.

The deal is valued at $7.3 billion with the assumption of $1.6 billion in TW Telecom debt. Level 3 is paying $10 in cash and 0.7 of a share of Level 3 stock for each TW Telecom share.

Level 3 stock dropped 4 percent Monday, an indication that shareholders may be concerned that TW Telecom, long rumored to be on the block, will attract another bid. That could force Level 3 to sweeten an offer that values TW Telecom's stock at a 12 percent premium over Friday's closing price.

"Both of them are seeing good momentum in the North American enterprise space," said Donna Jaegers, an analyst with D.A. Davidson & Co. "This should just continue that momentum."

In an interview Monday, Level 3 executives said the acquisition shouldn't disrupt the company's recent financial turnaround. The company has posted two straight profitable quarters after years of losses.

"We continue to feel good about our outlook," Patel said.

He said integration should be less complex than Level 3's 2011 purchase of Global Crossing, which had international operations. During the two years after that deal closed, Level 3 implemented at least two rounds of job cuts, shedding more than 1,000 positions.

Storey said Level 3's network reaches only about 10 percent of the 21,000 buildings that are connected to TW Telecom's network.

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